The major indexes posted monster gains on the back of the Trump victory as the investing thesis for the last eight years was reversed.
Last weekend we had the "longest losing streak since 1980" for the S&P. In only five short days that turned from a four month closing low on Friday to a record high this Friday. It is amazing how fast the market can turn when the information changes the outlook for portfolio managers.
Analysts believe the period of "monetary stimulus and stagnation" has ended and we are entering a period of "fiscal stimulus and growth." While this has not happened yet, it is likely to begin in 2017.
The last time republicans controlled all three branches of government was from 2003-2007 during the Bush presidency. The first 2 years they only had a 1 vote majority in the senate and the country was still reeling from the 9/11 attack and the war in Iraq. Still, the S&P rose from the March 2003 low of 789 to the 2007 high of 1,576 or almost 100%. Bush did not have a fiscal stimulus mandate. He was fighting a war and that caused a lot of division and distraction.
The market is in rally mode because of what managers believe will be a stimulus economy. Trump has promised to rebuild roads, bridges, airports and communities. Promises are easy to make. Living up to those promises is a lot more difficult. Temporarily, the markets are in panic mode.
Investors have been invested in dividend stocks, big cap tech stocks, staple stocks and consumer discretionary stocks. Those were the "safe" areas in an economy growing at just over 1% GDP.
Since Tuesday's victory, materials, industrials, banks, defense, aerospace, transportation, mining and energy stocks have been winners. Safe stocks like KO, PG and MO along with big cap tech stocks like AMZN, FB, GOOGL and NFLX have been sold to raise money to invest in the sectors expected to thrive under a Trump presidency.
This has been an excellent example of sector rotation. Sectors that were expected to suffer with further regulation under a Clinton presidency have prospered over the last several days.
Portfolio managers have also been dumping bonds and treasuries to raise money for equities. Under the current assumptions about a Trump presidency, the Fed will be free to hike rates and the government will be selling another trillion in new debt over the next four years to finance the rebuilding of American infrastructure. Both of those are a recipe for higher rates. This caused a major spike in treasury yields as investors ran for the exits.
The dollar rallied to a ten-month high on expectations for a return to growth and a rise in interest rates. This crushed commodities with gold falling from the $1,338 high hit at midnight Tuesday night when the election outcome became apparent, to $1,220 on Friday afternoon. That is a 9% decline in three days.
Early Friday morning somebody sold 85,000 contracts of gold futures worth more than $10 billion and the price fell about $25 dollars. I am surprised it did not drop $100 an ounce. That is a strong testament to the liquidity in our futures markets.
The CME said combined financial and commodity futures set a one-day record on Wednesday with 44,516,949 contracts traded. That beat the prior record of 39,567,064 from October 15th, 2014.
The biggest indication portfolio managers had suddenly turned bullish was the spike in the small caps. The Russell 2000 rebounded +125 points since last Thursdays close at 1,157 to close at 1,282 on Friday. That is a gain of 11% in only six days. The index closed only 13 points below its 2015 historic high at 1,295.80. The Russell had refused to even move close to the high over the summer when the other indexes were in rally mode. This was a pure risk on rally.
The sector that took the biggest hit was the firearms sector. Since Trump is solidly pro gun with several initiatives that would reduce firearms regulation, the gun stocks were crushed. Clinton would have put anti-gun judges on the Supreme Court and had said she would regulate guns by executive order and allow manufacturers to be sued by victims. Sturm Ruger (RGR) fell from $64 to $47 in the three days since the election. The idea is that citizens will not be storming gun stores to load up now that regulations will soften.
The economics on Friday were limited to the Consumer Sentiment Survey for November. Sentiment reversed from the -4 point drop to 87.2 in October with a +4.4 point rebound to 91.6 and the highest level since June. The present conditions component rose from 103.2 to 105.9 but it was the laggard of the two components. The expectations component spiked from 76.8 to 82.5 for nearly a +6 point jump. The October reading was the lowest level since September 2014.
The number of respondents expecting economic conditions to improve surged from 35% in October to 44% in November and the highest level since May.
It will be very interesting to see what the next survey says about the second half of November.
The calendar for next week has 13 speeches by Fed members and you can bet they will be setting the stage for a December rate hike. The election is over, the market is exploding higher, earnings were better than expected and the GDP posted an unexpected rise in Q3. At this point, this is a free rate hike for the Fed. There is no downside risk for them and they may start changing their forecasts for 2017.
The CME FedWatch Tool is showing an 81.1% chance of a rate hike in December. That is pretty close to a sure thing in Fed terms.
It is a good thing the market was already in rally mode because there was very little stock news to generate interest on a Friday.
JC Penny (JCP) reported an adjusted loss of 21 cents that matched estimates. It was their 11th consecutive quarterly loss. Revenue of $2.86 billion missed estimates for $2.95 billion. Same store sales fell -0.8% and missed the +2.2% increase analysts expected. The company revised its full year sales forecast to 1-2% from 3-4%. They said same store sales in the current quarter could rise by 2-5%. The CEO said a warmer than normal September and disruptions caused by the roll out of appliance showrooms in 500 stores, hurt sales.
On Thursday after the close Nvidia (NVDA) reported earnings of 94 cents that beat estimates for 69 cents. Revenue was $2.0 billion and analysts were expecting $1.69 billion. Gross margins rose to 59.2%. Revenue in the video game segment rose by 63% to $1.244 billion. Revenue from the datacenter segment almost tripled to $240 million and should rise sharply in the coming quarters as well. The company announced a 22% hike in the dividend to 14 cents and said it would return $1.25 billion to shareholders in fiscal 2018 in dividends and buybacks. Nvidia guided for revenue in the current quarter of $2.1 billion and analysts were expecting $1.69 billion. Nvidia shares spiked 30% on the news.
Disney (DIS) reported earnings of $1.10 compared to estimates for $1.15. Revenue of $13.14 billion missed estimates for $13.47 billion. Shares dipped from $95 to $91 in the afterhour's session but CEO Bob Iger rescued the stock from a loss on Friday. He said the decline in ESPN subscribers had bottomed. He said ESPN grew in 2016 and was expected to continue growing long term. Iger said Disney was rebuilding the subscriber base through "skinny bundles" designed to be delivered over the Internet through Hulu, Sling, DirecTV and others. He said the various providers are very interested in providing ESPN because that programming is a big selling point for their services. Iger also discussed the next wave of box office blockbusters that would be out in 2017. He also said Shanghai Disney had seen more than 4 million visitors and would break even in 2017. His comments lifted the stock off that $91 low to close at $97.68 with a $2.75 gain.
There are three Dow components reporting next week. Those are Home Depot, Cisco Systems and Walmart. The number of earnings reporters has slowed significantly but there are still some recognizable names. Other than the Dow components, Salesforce.com is probably the most watched event.
Alibaba (BABA) said it sold $17.7 billion in goods during its Singles Day promotion on Thursday. That was 32% higher than the 2015 event but did not compare well to the 60% increase in 2015. When Alibaba first held the event in 2009 there were 63 vendors that took part in discounting their prices. This year there were more than 40,000 vendors, with 30,000 international brands. The impact of the event on Alibaba's bottom line is shrinking. Because of the steep discounts, consumers are now waiting weeks or even months before making their purchases on Singles Day in order to save money. That means the one-day volume is rising but only at the cost of shrinking sales in the month leading up to the day. The profits are less from each item sold because of the steep discounts.
In addition, the SEC and Chinese regulators are investigating how Alibaba accounts and reports Singles Day sales and the Chinese regulator warned the company earlier in the week to avoid fabricating sales figures and misleading advertising.
Valeant Pharmaceutical (VRX) may try to clean up its image by changing its name, according to Bill Ackman. The company was previously called Biovail but changed its name to Valeant after it acquired that Canadian company in 2010 and moved its corporate office to Canada. Ackman said several new names had been discussed but no decision had been made.
Crude prices dipped to $43.03 on Friday after OPEC reported it produced a record 33.64 million bpd in October. That was an increase of 240,000 bpd. It would have been worse but Angola's Dalia field is offline for maintenance and their production declined -165,000 bpd. The largest increases came from Libya, Nigeria, Iraq and Iran. In October, Iran increased production by 210,000 bpd, Iraq 88,300 bpd, Libya 167,500 bpd and Nigeria 170,000 bpd. Those are the same nations that have asked to be exempt from any production agreement. You may remember, OPEC said it was initially going to freeze production. Then they said they would cut production to 32.5 mbpd. Now they claim they are trying to get an agreement to cut production to 32.5 to 33.0 mbpd. Notice, the target is rising and the upper limit is near the current production levels so the cut is reverting to a freeze but the four countries with the biggest production increases want to be exempt.
The odds of getting a meaningful production agreement are very low and the odds of having everyone honor the agreement are zero.
OPEC said demand for OPEC crude would average 32.69 mbpd in 2017. That means the 800,000 bpd surplus in September will rise to 950,000 if production remained level and we know that is not going to happen.
The IEA said demand grew by 1.8 mbpd in 2015, 1.2 mbpd in 2016 and is expected to grow by 1.2 mbpd in 2017.
U.S. production rose from 8.522 mbpd to 8.692 mbpd for the week ended on 11/4. That is the highest production since the week of June 10th but still down from the 9.185 mbpd in the same week in 2015.
Active oil rigs rose by +2 to 452 and gas rigs declined -2 to 115. One miscellaneous rig was deactivated for a net loss of -1 rig for the week.
With the price of oil at $43 and falling, the pace of rig activations is going to slow. There are only a few places in the U.S. where drilling is profitable at $40 oil.
The Dow futures fell about 1,000 points in two days after the Brexit vote surprised everyone with a win that contradicted the polls. In the presidential election the dip was -976 points from the 8:PM high to the 10:30 low at 17,418. That is now being called the "Trexit" dip.
In my Tuesday night commentary the closing sentence said, "Sit back and relax and be prepared to buy any dip." By the time the market opened on Wednesday the majority of the drop had already been erased with the Dow only down about 75 points and the S&P down -14 at the open. If you bought that dip, you should be a happy camper.
The Dow closed at a four-month low the prior Friday at 17,890. This Friday it closed at a new high at 18,847. That was a 959-point rally or 5.36% in just one week. In any view of this chart, this would be an extremely overbought condition. In normal circumstances traders would mortgaging the farm to short this chart. However, these are not normal conditions.
The investing outlook has changed significantly. Sector rotation is rampant and portfolio managers are scrambling to match their investments to the new reality.
Fortunately, that reality is a long way off and there will be some profit taking as soon as the price chasing ends. The market was heavily shorted going into the election as evidenced by the 9 consecutive days of declines. In theory, most of those shorts should have covered by now but there was still some activity on Friday.
The Dow did waffle Friday morning and spent most of the day in negative territory. By the close, the shorts were covering again. Next week should be a different market. The long-term bias should remain bullish but I expect the volatility to continue as the sector rotation continues.
The Dow chart is broken. The sudden sprint should have left the index winded and I would look for support in the 18,600 range. Until we actually see some decent weakness and watch for support to form, any projection is just a guess.
The Nasdaq Composite struggled to touch 5,300 and managed to make another lower high before dropping back to 5,179 on Friday. The damage was almost entirely in the big cap tech stocks as investors rotated out of those names and into the sectors expected to do well over the next four years. This tech weakness should not last but given the current market environment, it is tough to predict a big cap tech rebound. The composite index closed 100 points below its prior highs.
The Nasdaq 100 big cap index fell significantly to below 4,700 on Thursday. There was a flush of the big cap techs that appeared to be a monster sell program at the open on Thursday. The NDX fell from 4,855 to 4,685, a decline of -170 points in less than two hours. That was a real shock to holders of those stocks. The 4,850 level is now resistance with 4,650 as support.
The S&P spiked to 2,182 at the open on Thursday and then faded because the big cap tech stocks are components of the S&P-500. The decline found support just above 2,150 and the 100-day average at 2,148. This should be a decent support level unless the market decides the rally was in error and really tanks.
If you notice the Brexit rebound back in June. After the three days of gains there were four days of indecision and consolidation before the S&P shot up another 75 points. This is what I am expecting for the coming week. I expect some indecision and consolidation and then another leg higher.
The investing outlook has changed as I explained at the beginning of this commentary. Portfolio managers will continue rotating vast amounts of money into the sectors expected to gain over the next four years.
Anyone looking at the Dow chart above should be worried about adding new longs in this market and I do not blame you. That chart is scary. It is however, just 30 stocks. The broader market as evidenced by the S&P is far less bullish and the last two days have already seen consolidation. I would definitely be a dip buyer and a cautious buyer of stocks that have not rallied significantly over the last week.
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Wow! Bullish sentiment soared 15.3% for the week that ended on Wednesday. This only included one trading day after the election. The majority came from the neutral camp, which shrunk -10.3% but some of the hard-core bears also converted. This was an amazing reversal showing the election uncertainty is over.
JP Morgan said bond investors lost more than $1.2 trillion last week as a result of the election. The dollar value of the universe of tradable bonds fell from $54.2 trillion to $53.0 trillion. At the same time, the dollar value of global equities rose from $51.5 trillion to $52.3 trillion. On Friday, Deutsche Bank warned the spike in yields and the rise in the dollar will likely unleash the next leg lower for stocks. Somebody is always wrong.
JPM said the reasons behind the Brexit win and the Trump win were the same. Voters were fed up with growing overregulation, taxes and political correctness. They also said market participants had been "de-risking" for the two weeks ahead of the election and suddenly found themselves under invested with the market racing higher. This prompted price chasing in an attempt to catch up and get reinvested again. More than $22 billion flowed into U.S. equity ETFs over the last three days. That was three times more than flowed out in the prior week and the strongest three day streak since January.
Monday November 14th will be the largest super moon since 1948. This will not happen again until the year 2034. The moon will be significantly closer to earth and the light from the moon will be 30% brighter than a normal full moon. The moon will be closest to earth at 6:22 AM ET on Monday morning. However, viewing it Sunday or Monday night will not be appreciably different. Either stay up late on Sunday or set your alarm clocks for Monday morning.
Buy a piece of history that never happened. Newsweek printed and shipped 125,000 magazines celebrating Hillary Clinton's historic presidency. They were so confident that she was going to win they printed the edition and shipped it. There was an immediate recall on Wednesday morning but some had already been sold. If you missed it at the local magazine stand, you can buy one on Ebay for about $225. Newsweek apologized and said they will have a new Trump edition out next week.
Enter passively and exit aggressively!
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"In almost every walk of life, people buy more at lower prices; in the stock market they seem to buy more at higher prices."